Arthur J. Gallagher & Co. insurance brokerage reported 2005 fourth-quarter net income dropped $41.6 million, or 85 percent, driven down by the loss of contingent commissions, regulatory expenses and a soft market.
Net income for the period in 2005 fell from $49.1 billion, or 52 cents a share in 2004, to $7.5 million, or 8 cents a share. Revenues grew 1 percent, from $373.4 million in 2004 to $376.1 million.
For the year, Gallagher reported net income dropped $157.7 million, going from $188.5 million, or $1.99 a share in 2004, to $30.8 million, or 32 cents a share. Revenues, however, increased 3 percent, going from $1.44 billion to $1.48 billion in 2005.
The Itasca, Ill.-based firm has eliminated contingency commissions and in early May of 2005 set up a $27 million settlement fund for clients.
Those moves came in the wake of numerous regulatory investigations and a growing number of civil suits over the alleged nondisclosure of volume-based contingent commissions to clients as well as allegations of bid-rigging and steering of contracts to carriers.
The results of the changes became clear today in the company's fourth-quarter 2005 financial results.
“Sometimes it's the unforeseen things that can come out of the blue that really test your mettle,” said J. Patrick Gallagher Jr., president and chief executive officer of Gallagher, during a conference call.
“Whenever I was asked what kept me up at night, I had a laundry list of items, but never, ever, did I think we would face the regulatory and litigation risks that we faced in 2005.
“I'm glad to say that I think we are successfully dealing with all those issues and, hopefully, we should conclude most of them in 2006,” he continued.
Looking ahead, Mr. Gallagher said the company future “is going to hold additional challenges. None of us around this table can predict what they'll be, but what I can say with certainty is that the Gallagher team, all of us, will have the fortitude to deal with them and stay focused on building the best business in the insurance industry and delivering results to our shareholders.”
Mr. Gallagher said the company has made “substantial management changes” in its London operation and cut costs after poor performance there.
Gallagher took a $38.6 million pretax charge in the fourth quarter as its best estimate to cover the remaining costs to resolve legal actions connected with contingency fee issues.
The firm also took a $15 million charge related to its global insurance brokerage business in light of legal interpretations in the United Kingdom over accounting for claims handling and administrative services for reinsurance brokerage clients.
Despite problems the company has had, Mr. Gallagher said there are some bright spots on the horizon, which include the placement of workers' compensation business in Australia, which is controlled by the government there, improved client retention in 2005, and perceived pick-up in acquisitions for 2006.
He also noted the firm has agreements with five of its nine insurance carrier partners to increase upfront commissions by one to one-and-a-half points on some lines of business.
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